World Economy

Australian budget cuts tax for SMEs, middle income earners ahead of federal election

Yolande Chee | Producer | Special to

Australian Treasurer Scott Morrison has delivered a budget focused on the backbone of Australia's economy — small and medium-sized businesses (SMEs) and middle-income earners — just days before Prime Minister Malcolm Turbull is expected to call an election.

The budget came after the Reserve Bank of Australia stole Morrison's thunder on Tuesday with a surprise 25 basis-point cut to the cash rate to a new all-time low of 1.75 percent, with the central bank citing surprisingly low inflation.

It also comes as Australia transitions away from a reliance on mining to fuel the economy, and as Turnbull attempts to set up his Liberal government as the one most trusted to handle the uncertain economic outlook.

Lee Chin Yong | iStock/360 | Getty Images

SMEs will benefit from a cut in the company tax rate, starting with a reduction in the small business tax rate. Companies with revenue of up to 10 million Australian dollars ($7.5 million) per year will have their company tax cut to 27.5 percent, from 28.5 percent. The threshold to qualify as a small business was raised from A$2 million to A$10 million.

Within 10 years, the government plans to lower the tax rate for all businesses to 25 percent, in an attempt to make Australia's company taxes more globally competitive.

Morrison said, "What this does is invest in small and medium enterprises first to lower their tax burden to give them the encouragement to go out and invest. It's those small and medium-sized enterprises that we believe are more likely to reinvest their earnings."

In what is the closest budget to an election in decades – Australians are expected to head to the polls on July 2 – Peter Chen, senior lecturer at the University of Sydney, said the government was working to a pre-budget script, although not excessively so.

"It is a foundational document for the election. There are no surprises in it…This is all about small and medium enterprises as the engine of the economy, and the engine of growth," Chen said.

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Chris Richardson, chief economist at Deloitte Access Economic, said the government's tax measures were a step in the right direction but might not be vote-winners.

"Those tax cuts are genuinely good," he said. "They're not politically popular but they're the most growth-friendly thing in this budget, and that is a standout. They're pretty slow and I'm sure business would have liked them faster, but given the political environment this is not a bad outcome."

Middle-income earners, meanwhile, got a pre-election sweetener by way of a tax cut. Workers currently earning A$80,000 or more are currently taxed at the second-highest bracket of 32.5 percent but the Treasurer proposed this bracket threshold be lifted to A$87,000.

"This is about providing more room in our tax system for average full-time wage earners to earn more without being taxed more", Morrison said.

A return to a balanced budget is still years away, however, with no return to surplus in the four-year forward projections released with the budget. The budget deficit is expected to fall to A$37.1 billion in 2016/17 from A$39.9 billion in 2015/16, dropping to A$6 billion in 2019/20.

Richardson said that while the budget had not made much progress on the country's deficit, there remained some big risks to the bottom line, including the knock-on impact of China's economic slowdown.

"China is doing fine now, partly because debt has jumped again," Richardson said. "But China could run into more troubles down the track and that would be big trouble for Australia's budget in particular."

- Reuters contributed to this report

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